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Concept of Elasticity

Use an elasticity concept to explain each of the following observations.

a. During economic boom times, the number of new personal
care businesses, such as gyms aand tanning salons, is proportionately greater than the number of other new business such as grocery stores.

b.Cement is the primary building material in Mexico. After new technology makes cement cheaper to produce, the supply curve for the Mexican cement industry becomes relatively flatter.

c. Some goods that were once considered luxuries, likea telephone, a new considered virtual necessity. As a result the demand curve for telephone service has become steeper over time.

d. Consumers in a less developed country like Guatemala, spends proportionately more of their income on equipment for producing things at home like sewing machines, than consumers in a more developed country like Canada.

Solution Preview

Elasticity is the extent to which a demand or supply curve reacts to a change in price or quantity. Variations in elasticity are the result of the necessity of the good or service. For instance, heart medicine is a good that is essential and, therefore, the price can fluctuate a great deal and the demand will remain the same. In fact, until the price reaches the point that it is simply not affordable, the demand will likely remain the same. Alternately, a good or service that is not as essential, say spa treatments, will have greater elasticity in the pricing. Meaning as the price of the service increase, the demand will fall because some people will simply not be willing to pay the increased price for the service. The elasticity of supply is similar, except that rather then changes in price and demand, the elasticity of supply is related to changes in quantity supplied. Keeping this explanation in mind helps in the understanding of the problems listed.

a) During economic boom times, people generally have more discretionary income. Because of ...

Solution Summary

Concept of Elasticity is employed.